Determinants of Real Effective Exchange Rate: Evidence from Panel Unit-Root and Co-Integration Approach

Evidence from Panel Unit-Root and Co-Integration Approach

Abstract

This paper examines the determinants of real effective exchange rate (REER)
for a panel of 13 countries covering post Bretton Woods period. The
fundamental determinants of the equilibrium real exchange rate are terms of
trade, trade openness, government expenditure, technology and capital
controls. Im, Pesaran, and Shin (1997) unit root test confirms the nonstationarity of all the series. Pedroni (1997) co-integration test confirms
stable long run relationship between REER and real variables. REER
appreciates in response to changes in terms of trade, productivity and capital
flows, and depreciates in the presence of open trade regime. Our results are
robust to different measures of REER and trade openness.